Palm's Pre can't offset Sprint's subscriber losses

Sprint called the launch of the Palm Pre a success, but it wasn't enough to offset a net subscriber loss of 257,000 in the second quarter.The subscriber loss, which came amid a churn rate of 2.

Sprint called the launch of the Palm Pre a success, but it wasn't enough to offset a net subscriber loss of 257,000 in the second quarter.

The subscriber loss, which came amid a churn rate of 2.05 percent, illustrates Sprint's challenge. The company is launching new handsets---Palm Pre, Samsung Instinct s30, HTC Snap and the BlackBerry Tour---but is still having trouble retaining customers.

Meanwhile, Sprint reported a wider-than-expected second quarter loss, a fact that may be worrisome given the carrier's big bet on the prepaid market, which includes a bunch of subprime customers. On Tuesday, Sprint bought Virgin Mobile for even more prepaid exposure.

Sprint reported a net loss of $384 million, or 13 cents a share, on revenue of $8.1 billion, down 10 percent from a year ago. According to Thomson Reuters, Wall Street was looking for a loss of 2 cents a share.

Sprint CEO Dan Hesse summed up Sprint's conundrum:

"The widespread visibility surrounding our record-breaking June launch of the Palm Pre handset gave us an unprecedented opportunity to showcase these improvements to customers as a new Sprint...However, we are not satisfied that we lost a quarter of a million customers in the quarter."

The company said that its poor financial results were due to lower contributions from the post-paid wireless business. That fact raises a question about what Sprint wants to be when it grows up. By focusing on the prepaid business Sprint risks blowing apart its profit margins.

By the numbers:

  • Sprint had 48.8 million customers at the end of the second quarter, down from 49.1 million in the first quarter. Of those customers, 34.3 million are post-paid.
  • Credit quality of the post paid customer base improved to 85 percent prime. Of course that means 15 percent of the base is subprime credit quality customers.
  • Churn in the quarter was 2.05 percent, down from 2.25 percent in the first quarter. In the second quarter a year ago, Sprint's churn rate was 1.98 percent.
  • Boost churn was 6.38 percent in the second quarter, down from 6.86 percent in the first quarter.
  • Wholesale and other revenue was down 44 percent from a year ago. That decline is attributed "to subscriber losses from one of our large carrier customers." There wasn't a lot of color on Kindle DX and Kindle 2 wholesale subscriptions.

Now there are positives. Sprint lowered its debt, generated good cash flow and can fulfill its debt obligations. However, Sprint only expects that full year subscriber losses should improve in 2009. That's not growth. Are slowing losses good enough?

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